Despite Great Political Changes She Managed Financial Stability Trough Her Policies

Oct 29 - Nov 04, 2007

Dr Shamshad Akhtar, Governor, State Bank of Pakistan, has been conferred with the prestigious and coveted award of the "Best Central Bank Governor for Asia 2007 to acknowledge her outstanding contribution in the overall financial sector and monetary policy management in Pakistan.

John Orchard, Managing Director of Emerging Markets Newspaper, a part of Euromoney Institutional Investor plc, one of the largest and most respected providers of financial information worldwide, presented the award to Dr Akhtar at an impressive ceremony held in Washington.

This award is based on nominations from regional investors, bankers, economists, analysts and other experts. The award also unequivocally signifies the exceptional contribution Dr Akhtar has made in the overall development of the country's financial sector and management of monetary policy. "It is a big distinction for Pakistan and recognition of Pakistan's standing in the emerging markets," Dr Akhtar remarked after receiving the award.

Finance ministers, governors of central banks from several countries, and senior officials of the international financial institutions, who were in Washington currently to attend annual meetings of the World Bank and International Monetary Fund, were present at the award ceremony.

Actually the World Bank and IMF Annual Meeting 2008 was held Willard Hotel, Washington D.C. last week where the governor Dr. Shamshad Akhtar was honored.

Speaking at the Award giving ceremony, John Orchard while playing glowing tributes to Dr. Shamshad endorsed Taimur's [Editor] view who said it is something we watch with pleasure. Our publishing house, Euromoney Institutional Investor, has always championed your economies and always believed that you would benefit from globalization, in particular the liberalization of capital flows across borders. Perhaps this is still debatable and indeed still debated but it is certainly our belief.

At the same time, we understand that culture and history are important and that local markets need especially careful stewardship and care, to make the most of the globalalized economy for their peoples: One size doesn't fit all in economic management. It is this broad theme that we celebrate this evening in your awards: careful, disciplined, independent management of your economies and banking systems, tailor made for the particular needs of your countries and peoples, so they can make the best of the rapidly changing but also increasingly uniform global economy I'd like to start our tour of the regions with Asia and specifically with Pakistan. I'd very much first like to say, of course, that our thoughts and prayers go out to the families who lost loved ones in recent Karachi atrocity.

It is especially kind in the circumstances that Shamshad Akhtar of the State Bank of Pakistan can be with us to pick up her award for our Central Bank Governor of the year in Asia:

There has been a great deal of political change in Pakistan over the past year, but the State Bank has managed to be an oasis of great stability, and has got on with its business calmly and firmly, in a turbulent environment. Even risking irritating the government in order to stick to policy. No mean feat something, as we've seen recently that even the Bank of England's governor can't manage! In particular we applaud the State Bank of Pakistan's work on risk management in the banking sector, and Governor Akhtar's firm stance on limiting government borrowing from the central bank, and also for laying the foundations for more effective monetary policy in the future.


Recently, SBP has introduced a perceptible strategic shift in the monetary policy formulation and its conduct, to allow greater scope for private sector credit growth in line with the emerging developments and requirements of the economy.

Monetary policy is undergoing qualitative changes. The old practice of preparing and announcing the annual credit plan with indicative targets of multiple monetary aggregates has been abandoned after the National Credit Consultative Council (NCCC) was restructured to operate as Private Sector Credit Advisory Council (PSCAC) that focuses on policy constraints impeding the sector credit delivery.

Targets for inflation and real GDP growth provide the basis for setting a consistent target for broad money (M2) expansion. Two major components of broadmoney are the NFA and the NDA of the banking system. NFA is determined by the excess of foreign inflows over outflows, whereas NDA, which is composed of the credit extended by banking system to government and private sector and the other items (net) is determined residually (i.e. M2 minus NFA). Thus, projection of banking system's NFA is the crucial component in the monetary policy framework.

Central pillar of this framework is that broad money expands by a multiple of reserve money. Hence, adequate level of reserve money which is consistent with the desired stock of M2 is determined using the estimated money multiplier. While SBPNFA is derived from the projected foreign inflows which include privatization receipts, sovereign bond issues, project and program loans, net forex purchases, etc. SBP-NDA is obtained as a residual. Within the SBP's NDA, net lending to Government for budgetary support is determined after providing for concessionary refinance support to the private sector that includes export related financing schemes26. From now onwards, SBP will be announcing and pursuing only the monetary growth target, consistent with the Government's real GDP growth and inflation rate targets. Furthermore, SBP is adopting a more sustainable approach to dealing with the two principal sources of reserve money growth, i.e., the Government's reliance on central bank borrowings and the refinancing operations, which dilute the central bank's monetary stance.

In future, it is important that government borrowing from the banking system be on a smooth path by better management of government's cash flows to meet the continued expenditure needs. Moreover, reducing the government borrowing (ideally by further retiring SBP holding of debt) from the banking system is imperative for containing inflation.

In this context, SBP has adopted a proactive approach in its dealings with the Government by exercising its statutory right to determine the limits of Government borrowing for budgetary support. In line with this position, the State Bank of Pakistan (under Section 9(A) of SBP Act 1956) has recommended the government to (i) retire borrowings from SBP by Rs. 62.3 billion, (ii) adopt quarterly ceilings on budget borrowings from SBP, and (iii) adopt a more balanced domestic debt strategy whereby budget is financed from long term financing sources; that are relatively less inflationary.

For this purpose, SBP has advised the Government to use Pakistan Investment Bonds, and issue Shariah Compliant Papers, which, among others, will allow Islamic Banks to meet their SLR requirements that are kept below par because of lack of effective supply in the system of Shariah compliant Government securities. As Islamic bank industry grows, absence of adequate SLR coverage, could pose a system risk to the banking sector.

In addition, SBP has decided to gradually reduce commercial banks reliance on refinancing facilities and encourage them to mobilize the desired level of resource to fully accommodate private sector credit. Ceilings on government borrowings from SBP coupled with tightening of refinancing window should help reduce pressures on reserve money growth. Lower government demand for financing from the banking system could provide more space, within the overall growth in broad money, to finance private sector credit requirements. More importantly, SBP is increasingly encouraging the banking sector to cater the credit needs of the private sector. SBP is also interacting closely with relevant stakeholders to increase access to finance on a broader front.

With continued momentum in foreign capital inflows, it will be more critical to achieve greater fiscal and monetary coordination to ensure recognition of the imperatives of monetary policy and encompassing inflationary pressures. Government borrowing from the banking system particularly from the central bank should be aligned with the monetary policy projections to ensure continued macroeconomic stability and avoid the risk of crowding-out of the private sector credit.

Concurrently, SBP will need to strictly adhere to the limits imposed on refinancing and encourage both banks and industry to rely increasingly on market based credit delivery systems.


The primary challenge for FY08 remains the achievement of CPI inflation target of 6.5 percent. SBP is determined to achieve this target, but at the same time is conscious of certain factors that pose considerable challenges to achieving the desired target.

High food inflation, which restrained the downward movement in overall inflation in FY07, has not yet shown any sign of improvement The twelve month moving average food inflation depicted a continuous up trend since June 2006 and in June 2007 YoY food inflation was recorded at 9.7 percent. Furthermore, the volatility in core inflation in FY07 indicates the possible inducement of second-round effects of high food inflation.

In short, for the coming months, food inflation is posing a key risk for the effectiveness of monetary policy; if it persists over long period it may fuel expectations of higher inflation. 4 SBP believes that in the short-run proper availability and distribution of food are critical in curtailing this inflation; as SBP can only impact the second round effects of high food inflation on overall wages and prices only in the medium to long run.

Volatility in oil price still persists and is expected to remain there in FY08. This could mainly be due to the current strong global economic growth that might result in higher demand for oil, thus pushing up its price. If higher oil prices are sustained, and pass on to the domestic economy, this would have a negative impact on domestic general price level, and calls for offsetting steps.

During recent months, a large part of Sindh and Balochistan has come under floods. This may have an adverse impact on the supply of livestock and some crops, especially minor crops, limiting their supply and reflecting negatively on already volatile food prices.

The federal budget for FY08, while carrying positive incentives, entails an expansionary fiscal stance with a substantial increase in the total budgetary outlay. In 4 Sustained high food inflation may lead to higher wages that may put further upward pressures on inflation in second round.

Recent and prospective trends in monetary aggregates have increased the risks of inflationary pressures in the economy making it a major source of concern for SBP in FY08. Monetary management in FY08 would be complicated and demanding due to the carry forward of the monetary stress generated especially from large capital inflows in Q4-FY07, sizeable demand pressures emanating from fiscal and external imbalances and the distortions from SBP re-financing schemes as well as the impact of supply-side factors (e.g., oil prices, food inflation etc.).

Larger foreign exchange inflows during FY07 have created significant demand pressure in the economy. There is an increasing trend in the inflows under workers' remittances, foreign investment, and debt financing. Benefit of large capital inflows notwithstanding, the resulting liquidity of these inflows can actually have adverse effects on macroeconomic stability and, above all, on inflation. If the current trend continues in FY08, it would indeed require effective sterilization to mitigate the risk of its adverse implications for monetary management

Another aspect that calls for vigilance by the SBP is the increase in reserve money due to heavy foreign exchange inflows to the government that have been witnessed in FY07 and are expected to continue in FY08.